In the first part of my article on the important areas of a financial due diligence I analysed four areas which have to be examined and analysed in detail to conduct a financial due diligence.
What is common to the additional areas discussed below is that while a financial due diligence is capable in itself of providing important information for clients, close cooperation between the professionals performing the financial and legal due diligence is highly recommended because together they can create the most added value for the client.
Employees are generally deemed special resources at all companies, while in certain industries, the income of employees along with related taxes and contributions are particularly significant cost factors compared to total costs. To get a precise picture of the costs that arise in this respect, we have to assess precisely what types of benefits, either regular or one-off, employees are due. Benefits recorded in contracts, 13th / 14th month or other bonuses along with those tied to performance have to be taken into account, but the number of additionally granted holidays is also important. If we plan certain reorganisations or rationalisations during which the jobs of some employees will be terminated, it is important how many months the termination period or the severance pay covers for the given employees. Significant extra cost can be generated if the severance pay due to an employee is higher than the minimum required by the Labour Code in Hungary, either due to an individual or a collective contract.
As for supplier contracts, it is important to check what type of contractual obligations the individual agreements mean for the company. Additionally, one of the most important issues is the deadline and conditions under which a given agreement can be terminated. This applies particularly if the contract is not advantageous for the company, or if the new owner can acquire the given product or service under more favourable terms. Although a financial due diligence typically does not cover examining whether a specific contract is advantageous for the company or not, the information the client can use to judge this may become available together with data obtained during a legal due diligence.
Similar to supplier contracts, one key issue for customer contracts is under what conditions we or our customers can terminate contractual obligations. In terms of implementing future plans, it is important to see how long the client can count on the orders of the given customers. On the other hand, it can be very costly if the company cannot or does not intend to serve these customers in the future, even though it has a contractual obligation to do so. Customer contracts can of course include agreements that are disadvantageous for the company. Assessing these aspects is beyond the scope of a financial due diligence, but the due diligence can provide information to reflect on.
Off balance sheet liabilities
Owing to their nature, potential payments by the company in the future due to off balance sheet liabilities will not be obvious from financial data to those performing the due diligence, but only from the given contracts, so it is particularly important for those conducting the due diligence to cooperate in this respect. Duties are generally divided in that while the team performing the legal due diligence identifies the contractual obligations, these obligations are priced within the framework of the financial due diligence.
Key areas of a financial due diligence – Part 1
Due diligence as part of supplier audit